Valuation of the machinery and computer equipment industry

Weekly Corporate Growth Report, Aug 27, 2001 by Tudor, Jan

Although the machinery industry has experienced pressure on many levels, it has held up fairly well in these uncertain economic times. Many companies experienced sluggish demand during the first quarter of 2001, due to softening industrial markets. Yet companies are optimistic that the situation will improve by the end of the year. According to Value Line analysts, machinery managers are currently trying to balance supply with demand, curtail costs and expenses, consolidate manufacturing, cut back on staff and pay down debt.

Global sourcing and Internet bidding are becoming much more frequent, and in turn are helping to create increased pressure to lower prices--some buyers feel that there are lots of "hungry" shops. Manufacturing is still a significant driver of the economy and it is necessary for machine shops to stay current with innovation, technology, and profits. Customers are also becoming more demanding than ever with the increasing choices in their favor.

The machine tool industry was once slow to react, but now competitive pressures force the successful operator to move quickly to match the latest trends and fill niche markets. One trend that is playing a role throughout manufacturing is outsourcing. Major manufacturers are pushing work onto first-tier suppliers, who in turn tell their suppliers to do more work. This results in smaller shops needing more sophisticated equipment to handle the complex jobs and larger operations needing to be able to take on turnkey assignments. Another trend affecting the industry is the tight labor market. Companies are having increasing difficulty finding skilled workers even though machinists and tool and die makers earn a high salary rate.

According to a Purchasing Online survey, 54 percent of the companies surveyed report they have outsourced manufacturing processes or services in the past two to three years. Also the survey discovered that critical and noncritical production goods rate second and third for outsourcing, in particular where metals processing is involved. As a hedge against the expected economic downturn, more companies outsource to avoid large capital investment in equipment and permanent work force.

According to Integra Information, the manufacturing machinery, equipment and parts industry (Standard Industrial Classification code 3599) realized average revenue gains of eight percent between 1995 and 1999. Industry revenues are forecast to increase by an average of 8.7 percent between 2000 and 2004 (see Table 1).

Computer Equipment

The technology sector did not fare well in 2000, as companies held back computer purchases after the Year 2000 compliancy issues came to a close, and consumers are becoming leery of the economy. However, analysts at Value Line believe that computer manufacturers will do well in the long term. In the mean time, computer manufacturers are laying off employees and streamlining manufacturing operations. Both Gateway and HewlettPackard announced disappointing fourth-quarter 2000 earnings, due to conservative consumer spending and weakening demand. Apple Computer cut prices in January 2001 in order to shed excess inventory, and an article in the San Jose Mercury News expects other computer manufacturers to follow suit.

The Electronics Outlook published in Purchasing magazine reports that supply conditions for the electronics industry will improve in 2001 because semiconductor suppliers boosted capital investments in 2000 by approximately 80 percent. In addition, leadtimes and tags for many parts are expected to shrink.

The home computers segment has experienced an eight-year growth streak, although the streak slowed slightly in 2000. Nonetheless, the Consumer Electronics Association (CEA) reports that the segment is still realizing modest growth. The CEA reports the 16.4 million PCs were shipped in 2000, an increase of 1.5 million units from 1999. However, the growth is expected to moderate, with only 17.5 million PCs expected to be shipped during 2001. The printer category is expected to continue its positive increases in sales, with 20 million units expected in 2001 (see Table 2).

According a Morgan Stanley Dean Witter report published in the January 2001 issue of Purchasing, corporate technology budgets are forecast to increase by eight percent, compared with 2000's 12 percent increase. Many computer manufacturers are cutting prices, and corporate buyers can expect lower prices for greater cornputing power in the near term. A recent Purchasing magazine survey indicates that 68 percent of corporate buyers purchase computer equipment via the reseller channel, while the large computer OEMs continue to sell most of their products directly.

Market researcher International Data Corp. predicts that global computer sales will increase by 16.6 percent in 2001, down from 2000's 18 percent increase. The key drivers for the slowing growth are business and consumer market saturation and moderating growth in emerging markets. The firm opines that consumer demand for computers in the U.S. will remain dampened until the fourth quarter of 2001, when demand will pick up the pace. The portables segment remains strong in both the consumer and commercial markets. Analysts with Dataquest forecast worldwide sales of notebook PCs to increase by 20 percent in 2001.